Competition for Order Flow and Smart Order Routing Systems

ABSTRACT

We study the rivalry between Euronext and the London Stock Exchange (LSE) in the Dutch stock market to test hypotheses about
the effect of market fragmentation. As predicted by our theory, the consolidated limit order book is deeper after entry of
the LSE. Moreover, cross‐sectionally, we find that a higher trade‐through rate in the entrant market coincides with less liquidity
supply in this market. These findings imply that (i) fragmentation of order flow can enhance liquidity supply and (ii) protecting
limit orders against trade‐throughs is important.